It’s tough times out there for many Americans. We’re seeing record numbers of people filing for unemployment. For those who have lost jobs, it can be scary to think about where the finances will come from to continue paying things such as rent, mortgages, grocery bills, etc. Thus, during these times, it can be tempting to tap into retirement savings, especially if you have managed to build up a decent-sized nest egg. While I strongly, strongly discourage you from using your retirement savings to get you through these tough times, I realize that it may really be the only option for some. If you find that you absolutely are certain you will need to take some money out of your nest egg to get you through a jobless period, there are some new provisions in the CARES Act recently passed by Congress that can help you. First off, Congress has increased the amount you can take out of your employer-sponsored 401(k), if you have one. The limit used to be $50,000, but they have temporarily expanded it to $100,000 and will allow you to suspend payments on repayment for up to one year. It also allows for the terms of the loan to be stretched from five to six years. Again, this is all temporary under the CARES Act. Another important provision of the recent legislation is that it allows you to take a distribution from other retirement accounts you have without having to worry about the 10% penalty if you are under 59-and-a-half. It should be noted that there is a limit to the size of the distribution and that is $100,000. Now, again, I am not encouraging you to hit up your retirement savings immediately when trying to get through a period of unemployment. Rather, I’m sharing these two important provisions with you so that you are aware of the possibilities to get through tough times. Of course, if you feel that you need to tap into your retirement savings, you should consult with a retirement professional or financial advisor to make sure it’s the right decision and that you understand what you are about to do.
IRAs and 401(k) are incredibly popular employer offered retirement plans. Many employers currently offer them and with the recent passage of the SECURE Act legislation, even more small businesses and enterprises will be able to offer such benefits to employees. However, IRAs and 401(k)s do have contribution limits, which can be on the lower side–especially for IRAs. Thus, if you find yourself in a situation where you want to do some serious catching up (aside from making catch-up contributions) with your retirement savings or have a sudden windfall (i.e. an inheritance), you may need to look at opportunities to help grow your nest egg outside of those traditional retirement accounts. Now, this doesn’t mean you can’t still make contributions to IRAs or 401(k)s if you have them, but rather, that you should look to open an account for the money you have left over once you’ve maxed out contributions. A very popular option is to open a taxable investment account. A good example of this would be to open an online brokerage account (i.e. E*Trade, TD Ameritrade, etc.). These types of accounts have no contribution limits and no limits on when you can withdrawal the money. They also offer a wide range of investment options (i.e. stocks, ETFs, Mutual Funds, etc.). However, these accounts are taxable and depending on the size and transactions done yearly, things might be a little confusing come tax time. A word of advice before opening a taxable investment account, do your research beforehand and take the time to assess what your tolerance for risk is, what your long-term goals are, and understand the different type of investment options. Investing can be an efficient way to grow your nest egg over time, but remember, there are risks involved. If you have questions about setting up a taxable investment account or just want to talk further about it, then you should speak with a certified financial planner or investment professional.
According a recent Washington Post article, Fidelity Investments had 200,000 participants in the 401(k) programs it managed who had over $1 million saved up at the end of this year’s third quarter. That’s a 4,000 participant increase from the just the previous quarter. These numbers are quite inspirational as they show that it’s far from impossible to save a million dollars for retirement, which seems to be the magic number for the dream retirement these days. However, those retirement accounts didn’t reach seven figures overnight. No, it took years of diligent saving and smart investing. You too can strive to reach that number. With some good investments and maxing out your contributions, you can put yourself on the right track. When it comes to investing, though, you need to make sure that you understand your appetite for risk so as to not jeopardize your savings. Risk can do a number to your account, especially if you don’t know when to minimize it and protect your portfolio. After all, if you’ve saved a million dollars, wouldn’t you want to protect it and ensure it lasts through your retirement. Now, some of you reading this may be nowhere near saving $1,000,000 in their 401(k) and may fear they will never reach that number. That’s ok. The vast majority of retirees will never get anywhere near the $1 million mark, but that doesn’t mean you can’t take steps as though you are aiming for it. For example, just because you weren’t maxing out your 401(k) contributions doesn’t mean you can’t start now. Or, just because you didn’t invest your 401(k) in the stock market doesn’t mean you can’t start now. Again, you don’t have to stash away seven figures in your 401(k) to save as though you are. If you need help with saving for retirement, you should speak with a certified financial planner or wealth manager.
The IRS recently announced retirement account contribution limits for 2020. The quick take away: 401(k) contribution limits are going up, IRA contribution limits stay the same, and just about all other retirement account contribution limits are also going up. Per usual, the increases are minimal. The 401(k) contribution limit is up $500 to $19,500, while the catch-up contributions will increase to $6,500 from $6,000 last year. IRA contributions remain topped out at $6,000 with a $1,000 catch-up contribution for those over 50. Contribution limits have been increasing just about every year in recent memory, so these should really come as no surprise. However, they should be used as a bit of motivation to start saving if you haven’t been doing so. It’s also a good time to think about upping your contributions next year–if you can–and trying to reach that max. While you probably won’t be able to max out your retirement account contribution limits every year during your career, if you are able to max out for a decade or even a few years, that can go a long way towards building up your nest egg. If you need help with getting your finances in order in regards to retirement account contributions and building up a nest egg, you should speak with a certified financial planner or wealth manager.
Life can be unpredictable. Do you know how you will handle that unpredictability? For example, if you were faced with a sudden, substantial medical bill or your home was damaged in a storm, do you know where the money to pay for those expenses will come from? If you’re financially savvy/smart, you probably have an emergency fund set aside to help with those expenses. However, if you don’t have such money set aside or the costs are more than your emergency fund, you may need to find other financial resources to tap into. While I strongly discourage it and will only suggest it as an absolute last resort, taking an emergency withdrawal from your retirement funds is a potential option. I want to remind you, again, that taking emergency withdrawals from your retirement account is highly discouraged and should only be done under the rarest of circumstances. It’s also important that you at least understand the rules and consequences of taking a hardship withdrawal. First off, you will want to see if your retirement plan even allows hardship withdrawals. Most 401(k)s and IRAs allow for hardship withdrawals, but there may be specific guidelines you will have to follow. You will also need to ensure that the expenses you intend to use the money on qualifies as a “hardship” as defined by the plan rules or custodian. Many plans have a list of such events that automatically qualify (i.e. certain emergency medical procedures, required home improvements, etc.). Be aware that there will be tax consequences to a hardship withdrawal if coming from somewhere that isn’t a Roth IRA. You may even get hit with an early distribution penalty, depending on your age when you make the withdrawal. You will also need to make sure that the withdrawal is only for the amount of the expense and nothing more. Before you make a hardship withdrawal, you need to show that you have no other options as well, which may require opening up your financials to scrutiny. These are the main things you will need to be aware of, but there may be more depending on the retirement plan you want to take money out of and your personal situation. Taking a hardship withdrawal can be a tricky transaction that can open you up to serious penalties if not done correctly. If you are considering a hardship withdrawal, you will want to speak with a certified financial planner both to decide if the move it right for you and also to make sure that you do it correctly should you decide to do it.
Many companies offer retirement benefits. Those benefits can range from simply offering 401(k)s to a wide range of financial resources that can include financial planning and multiple retirement account options. Furthermore, with legislation working it’s way through Congress that could allow small businesses to band together to offer retirement savings plans, more Americans could find themselves working for an employer that offers such benefits. Regardless of the size of the company you work for, if you are taking advantage of any employer offered retirement benefits, you need to make sure that you understand what those benefits entail and what their limitations are. There are many ways to go about that. One easy way to understand your retirement benefits is to read over any paperwork you received or filled out when you first entered the plan (which you should have kept in a safe place or be able to access online). That paperwork most likely will tell you what you can and cannot do. If you have questions beyond that, you should be able to reach out to the custodian of your retirement plan. If you work for a larger company, you may have a benefits manager that you can reach out to. While they may not know all the answers, they should at least be able to point you in the right direction or get you in touch with a plan custodian who can help. If your company offers retirement planning talks or events centered around planning for retirement, you should try to attend those if possible. If you are new to the retirement savings game, try to make sure that you understand as much as you can about your retirement savings plan, particularly what you can do with it should you choose to leave your employer as well as your ability to change contribution rates. If you are not new to the retirement savings game and have had a retirement plan through your employer for years (or decades), you will want to make sure that you stay abreast of any changes to those plans and how such changes could potentially impact your future distributions or ability to rollover the plan. As always, if you need help with deciding what to do with your employer retirement plans or you want to combine it with an IRA, you should speak with a certified financial planner.
Over the course of a career, you will probably have multiple retirement accounts. You’ll probably open a 401(k) plan with each employer along with a personal IRA. It can be easy to lose track of those accounts over a career that lasts decades, especially for early-career jobs that may not last that long. While it is suggested that you be diligent with tracking your retirement accounts after you leave a job, it’s not uncommon for accounts to be forgotten about. If you do lose track of your retirement accounts, there are tools available to try to track them down. The Department of Labor’s Employee Benefit Security Administration can provide help over the phone as well as online (they have a searchable database of abandoned plans). Depending on the state you worked in, you may also want to see if that state has an unclaimed property division with a database similar to the federal government’s. Finally–as a last resort–you may want to reach out to your past employer where you set up your forgotten plan and see if they may have information regarding the custodian of your forgotten account. If you can reach the custodian, you should be able to get an idea regarding the location of the account. As stated earlier in this post, the best way to avoid all this is to keep track of your retirement accounts from the start. If you leave a job, be sure to either rollover your employer plan money into an IRA or you find a way to not forget the plan if you decide to keep it (this is a common option if you have worked for an employer for a long period and have a substantial amount saved in your employer plan). So, do you have any forgotten retirement accounts?
Paying down your debts should be an important retirement savings plan. Yes, I know it’s not saving, but it’s vital to your retirement plans. First off, the sooner you pay off your debts, the sooner you can start diverting more money into your retirement accounts. That money going towards debt payments will be much more useful in an IRA or a 401(k). Secondly, your debts won’t go away in retirement and you don’t want them to eat away at your nest egg only you actually get to retirement. Also, keep in mind that debts often involve interest and that the longer it takes you to pay off a debt, the more you will pay. Thus, it’s always a good idea to pay off your debts as soon as you can and to make it a priority during your income-earning years. Even if you aren’t able to pay off all of your debts before retirement, you should make it a goal to pay down as much of it as possible. Yes, you can pay down your debts and save for retirement at the same time. This will take some planning and budgeting. Most likely, you will want to involve a financial planner in such aspects so that they can help you take advantage of your assets or portfolio in paying down debts. A financial planner can also help you discuss budgeting and how be efficient in your saving and paying efforts. So, what are your plans in paying down debt in preparation for retirement?
You’re probably familiar with what a required minimum distribution (RMD) is, but do you know what a required beginning date (RBD) is? If you guessed that it’s the date that you begin taking your RMDs, then you are spot on. Knowing your RBD–and any associated options–can be almost as important as knowing how much you need to take out for your RMD. If you have an IRA, your RBD is April 1 of the year following the year in which you turn 70 1/2. There are no exceptions to that rule, unfortunately. However, if you have an employer plan (i.e. a 401(k)), you may be able to push back your RBD if you continue working or if you have a 403(b), you may be able to push back the RMD start date under the “old money” exception. If you have both an IRA and a retirement plan through an employer, then you may have more than one RBD, depending on whether you intend to take advantage of a “still working” exception or not. If you have questions about your RBD or are interested in discussing whether you may be able to delay it, you should speak with a certified financial planner or with your plan custodian.
Yesterday, I wrote about diversifying your retirement savings by having more than one type of retirement account. While such a concept is a good idea, it also needs to be done reasonably. While it’s okay to have more than one retirement account, it’s not a good idea to have multiple types of the same account or to have so many retirement accounts that you can’t keep track on them. If you find yourself in such a situation, you should consider streamlining your retirement accounts by doing a conversion or rollover so that you only have two, maybe three, accounts. Thus, if you have multiple IRAs, you should strongly consider rolling them over into one account. This will not only allow you to better track your money, but it will also save you on paperwork as one IRA means only one beneficiary document and one statement. Same thing goes with 401(k)s. If you find that you have multiple 401(k)s after working for multiple employers, I would strongly urge you to merge them all into one account. Again, this will save you time and paperwork hassle. This is even more important as you get closer to retirement and have to begin taking required minimum distributions (RMDs) as it will make it easier to calculate your distribution and ensure that you are meeting requirements. While this may seem a bit contrary to what I wrote about yesterday, it is really intended to make things easier for you. Furthermore, yesterday I was encouraging diversification and having multiple accounts of different types and not multiple accounts of the same type. This time of year is a good time to consider streamlining your retirement accounts also because tax season is right around the corner and you probably are going to review your account paperwork very soon, if you haven’t already. If you need help with streamlining your retirement savings, as always, you should speak with a certified financial planner or retirement expert.